Example Exercise 3-7 Fixed assets are the physical resources owned by a company and have a permanent or long-term life. Fixed assets are the physical resources owned by a company that have a permanent or long-term life. They can be thought of as long-term prepaid assets. They are used by a business to generate revenues; however, unlike other expenses, there may be no visible reduction in the quantity of the fixed assets. Instead they lose their ability or efficiency to provide useful services. The assets are “used up” or depreciated.

Adjustment for Depreciation Example Exercise 3-7 Adjustment for Depreciation Contra Asset The adjusting journal entry for depreciation is similar to the adjusting entry for supplies. The Depreciation Expense account is increased (remember that expenses are increased with debits). However, the fixed asset account is not decreased. This is because the original cost of the fixed asset, as well as the depreciation recorded since its purchase, are recorded separately on the balance sheet. Instead, an account called Accumulated Depreciation (usually followed by the name of the asset) is increased, or credited. Accumulated Depreciation is a contra asset account [CLICK] and is deducted from the related fixed asset account on the balance sheet. The normal balance of a contra account is the opposite of the account from which it is deducted. Therefore, since fixed asset accounts have normal debit balances, Accumulated Depreciation has a normal credit balance.

Adjustment for Depreciation Example Exercise 3-7 Adjustment for Depreciation Now, let’s record the adjusting journal entry for depreciation.

Adjusting Journal Entry Example Exercise 3-7 Adjusting Journal Entry Depreciation of equipment. Accum. Depreciation , Equip. The adjusting entry includes a debit to Depreciation Expense for $4,250 and a credit to the contra asset account Accumulated Depreciation, Equipment for $4,250 for the depreciation expensed during the period.

Assets = Liabilities + Owner’s Equity Example Exercise 3-7 Accounting Equation Impact Assets = Liabilities + Owner’s Equity The Depreciation Expense account has a debit balance of $4,250 which represents the depreciation expensed during the current period.

Example Exercise 3-7  For Practice: PE 3-7A, PE 3-7B Refer to Practice Exercise PE 3-7A and PE 3-7B for adjustments for depreciation.  For Practice: PE 3-7A, PE 3-7B